September 13, 2021 - 6:30pm
At the height of the Covid pandemic, you could be forgiven for feeling a touch sentimental towards Britain’s supermarkets. As we queued patiently for our rations, and applauded the shelf-stackers and delivery drivers, companies like Tesco, Sainsbury’s, Asda and Morrisons seemed to be a vital part of the collective effort.
But they are corporate businesses all the same, and their virtues have not gone unnoticed in booming world of private equity — at the more rapacious end of the world of finance.
Last week Morrisons called for a special auction to decide its future ownership following a bidding-war between two U.S.-based private equity firms. Asda was taken over back in February, and there is speculation that, before long, all the major British supermarkets may be in private hands.
As suggested by the fate of Debenhams — whose bankruptcy last year almost certainly had something to do with an earlier kneecapping by private equity — this is by no means good news for people who shop or work at these stores.
In theory, private equity firms want to make companies more profitable so as to ultimately sell them on, while pocketing a few extras along the way. In practice, private equity has a whole suitcase of dirty tricks for extracting quick profits out of companies, leaving them severely weakened in the process.
To begin with, there’s the ‘leveraged buyout’, which means that a company is bought almost entirely with borrowed money — debt which is then transferred onto the company’s own books. To help handle this debt, the business is streamlined, which inevitably entails cutting back on wages and sacking lots of staff.
Then there’s the infamous asset stripping. Assets held by the company, most notably property, are transferred to the private equity owners. The company then has to rent what it previously owned. And this is to say nothing of all the creative techniques for extracting ‘special dividends’ and management fees.
Take the case of Asda. The supermarket was taken over by a pair of petrol station tycoons from Bradford, the Issa brothers, together with private equity firm TDR Capital. But the new owners paid just ten percent of the £6.8 billion price tag. The rest came from a huge junk bond sale, and by selling off Asda’s warehouses and distribution system. The supermarket thus exchanged its assets for £3.7 billion in debt.
And nor is it just supermarkets. In the UK, everything from fast-food chains to healthcare firms have been bought up, and even major defence contractors are in the asset managers’ sights.
This last prospect led business secretary Kwasi Kwarteng to insist the government is monitoring takeover bids in light of national security risks. But given the experiences of the last 18 months, a similar logic must surely apply to supermarkets.
When the next crisis comes, do we really want to find that our main suppliers of food have been stripped of assets and laden with crushing debt burdens?
Wessie du Toit writes about culture, design and ideas. His Substack is The Pathos of Things.
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SubscribeFrank Lorenzo as ‘Corporate Raider’ Really began it all – amazing story how he bought, asset stripped, and then discarded airlines. The head of Continental Airlines shot himself in the head after Lorenzo got the airline.
I happened to be there as Lorenzo did Eastern Airlines, utterly destroying it completely after harvesting millions – but something not everyone knows is he found a loophole in the employee pensions that under crisis the airline can force them to loan the pot of money to the air line to keep it afloat! And using that he also managed to strip the Pension Pot! Leaving the retired workers with nothing! Lorenzo had to live out his life behind gates and with armed guards….
My local Grocery store a couple years ago had a preditory Australian company do that. First thing they did is fire all full time employees with any kind of seniority – as their pay was up, AND if full time the store had to pay their Health Insurance. One guy I knew there was fired with no warning (as they all were) but he had health issues and needed the insurance, had been there 15 years. When the manager (who I also knew) had to take the worker into his office and fire him the employee began crying, and the manager said it was the hardest thing he had done in his life. – and from then on mostly used part time help to avoid the Health Ins. issue. Eventually they sold it on, and it returned somewhat to normality.
It is the principle flaw in the American/British version of capitalism. We allow solvent companies like Cadbury’s to be bought by predatory vultures who load them with debt. It makes long term planning and investment a dangerous strategy because leaving undistributed profits within a business makes them vulnerable to a takeover. The problem is the legal position that shareholders are the only stakeholders whose interests are paramount. In fact shareholders are really only interested in short term gains either from dividends or rises in share values. I include myself in that. It’s no way to run businesses on which we all depend.
As a shareholder, I strongly disagree. First, I have noticed that some companies in which I had shares hit a bad patch, were acquired against my wishes at a price I consider too low because I was confident in the business’ future, but with the recommendation of directors. They have subsequently recovered their values, leaving me with the idea that either I’ve been cheated, or that my business instinct is superior to that of the directors.
Second, I do not find choosing companies in which to invest easy, and it consumes time. It’s therefore irritating to find that a buy-out has given me back a cash lump sum, so I have to start again to seek another business in which to invest, and in a market from which suitable investment prospects seem to diminish steadily.
And why is it that so many safe, long-term business are invested in by foreigners, not only equity funds, but pension funds too.
OF COURSE GOVERNMENTS HAVE TO PUT A STOP TO THIS EVIL PRACTICE AND HURRY UP ABOUT IT !
I’m reluctant to start believing that HM Government should start interfering in business, but it should at least recognise adverse macro effects on the UK economy, and take action promptly. I suspect that other governments, e.g. French, are more on the ball.
For example, if a company like Morrisons pays corporation tax and distributes dividends to pension funds and other UK recipients, it is surely stupid to allow a buy-out fund to strip cash and replace it with loans paying excessive interest to a tax haven, thereby eliminating taxable profit.
What is more, if, or when, the company gets into trouble, you can be sure that these loans have fixed and/or floating charges on the assets, so lenders are at far less risk than unsecured creditors, being their suppliers, farmers …….. and HMRC. The man-in-the-street is usually unaware of the pernicious effects of such securities.
No doubt the directors are retained for continuity, but it might be healthier if they were dismissed.
Maybe we should pre-empt that crises and change our shopping behaviour. Supermarket are not a force of nature, they are just shops. There are many other type of shop. I haven’t been in a supermarket for 18 months, I spend less and eat nicer food by going to the same shops people used before supermarkets (most butchers also do ready-meals – not that I buy them), all within 5 minutes walk. And last week I ate a peach that tasted like a peach, rather than a dry hard cardboard tasting peach like thing. Let them die, we will adapt.
I enjoyed the same luxury while working from home and jolly nice it was too to visit my local butcher or fishmonger at lunchtime. However, now that office working has returned, at least for many people, this is no longer feasible. Matthew Fort encapsulates the problem, at least from the UK perspective, in Eating Up Italy, where, while buying food early evening along with locals on their way home from work, he notes that the UK’s independent food retailers operate for the convenience of the shop owner rather than the customer: they close just as many potential customers finish work. The consequence is that the supermarkets get an easy ride.
Isn’t this exactly what has happened to England plc? Not only British companies but most of our skilled jobs (& manufacturing) including IT (Mr Sunak’s father-in-law can elaborate on that) and engineering “Sold” or “Offshored”. Ignore small businesses and sole traders – all contributors to the country’s wealth to a greater or lesser extent. Whilst spending significant money the country doesn’t have then the government acting surprised when our deficit continues to grow. Anything Labour can screw up, the Tories can screw up even better!
I guess you know very well that the food shortages in the supermarkets had nothing to do with their ownership structure.